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Pensions as an Inheritance Vehicle – What Impact do Recent Changes Have?

Gresham Wealth

The world of pensions advice has been turned on its head since April 2015. The widely discussed ‘pension freedoms’ mean greater flexibility for those approaching or in retirement and have as such sparked a great deal of interest from the media and general public alike. As chartered financial advisors, we have certainly seen an increase in interest in this aspect of financial planning.

According to some reports, many of those who plan to use their pension as a means of passing on wealth have taken steps to increase their pension contributions since the changes were announced. Conversely, there have been a number of reports suggesting that retirees are using the new freedoms to withdraw funds to invest in other ventures, such as businesses or property portfolios. Whilst flexibility can be a positive thing, it’s important that you fully understand the implications any actions will have before making such important decisions. Here are some key points for consideration.

Beneficiaries of inheritance via a pension stand to be much better off since the 55% death tax was scrapped in April. Now, if a pension holder dies before the age of 75, they can pass their pension pot on to direct decedents without any tax implications. If over the age of 75 upon death, withdrawals from the inherited pension are taxed at the recipient’s relevant income tax rate.

Furthermore, surviving spouses are now able to take annuities from their husband’s/wife’s pension if they pass away before age 75.

That is all pretty straightforward. However, as announced in the conservative budget, further changes to pensions will be introduced over the coming 12 – 18 months.

Savers will need to bear in mind that the annual allowance for pension contributions will be tightened for higher earners, starting in April 2016. A new tapering system will be applied to those with an income of over £150,000 reducing their tax free allowance by £1 for every £2 over a £150,000 threshold. This will apply up to incomes of £210,000, over which a fixed £10,000 allowance will apply. It should be noted that retirees who have already taken money out of their pension using the new “flexible access” provisions will already have a reduced initial annual allowance of £10,000. The tapering will still apply to this amount, meaning that those with earnings over £150,000 will have their allowance further reduced accordingly.

From April 2016, the lifetime allowance for pensions will be reduced to £1 million. Those looking to use their pension as an inheritance vehicle will need to consider this carefully – if you are approaching the lifetime allowance maximum or feel you may be affected by the reduction in the lifetime allowance, it’s important to seek advice as soon as possible. The tax penalties for exceeding the lifetime allowance are considerable and any remedial action to avoid such taxation will vary depending on your individual circumstances.

There is no “one size fits all” solution for inheritance planning and whilst recent pension changes have provided more choice, the best route to take to maximise the inheritance you are able to pass on will very much depend upon personal circumstances. Please get in touch if you require further advice on any of the aspects mentioned in this article.


The information contained within this article does not constitute financial advice.

The Financial Conduct Authority does not regulate tax advice.


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